« PreviousContinue »
to prior approval of the National Office, may issue a State Instruction authorizing such binders to be accepted for periods longer than 60 days.
(5) Submission of Policies. (i) For Farmer Program (FP) loans secured by a first lien, the original policy or declaration page must be delivered to the County Supervisor. The original policy or declaration page will be returned to the borrower after one year using Form FmHA or its successor agency under Public Law 103-354 426-4, “Notice of Expiration of Insurance."
(ii) For Single Family Housing (SFH) loans secured by a first lien, the original policy or declaration page must be delivered to the closing agent.
(iii) In cases where an FP or SFH loan is secured by other than a first lien and the mortgage clauses include the names of the prior mortgagees, a certificate of insurance, copy of the policy, or other evidence of insurance is acceptable.
(iv) The County Supervisor will process an advance to pay for insurance only in strict compliance with provisions of g 1806.6 of this subpart.
(6) Master sets. If the master sets meet all of the requirements of this Instruction they may be accepted in lieu of an original policy for each FmHA or its successor agency under Public Law 103–354 borrower.
(i) One complete master set of the different insurance forms for policies issued by the insurance company must be on file in each County Office where the company insures property of FmHA or its successor agency under Public Law 103-354 borrowers.
(ii) The “Declaration Page" furnished by the insurance company for each borrower insured, in lieu of a complete policy, will be filed in the borrower's case folder. When a "Declaration Page" in the form of a computer printout is used by an insurance company an endorsement on every policy issued by that company or a letter from that company will be obtained and attached to the printout. However, a letter signed by an authorized official of the company and addressed to the State Director may cover all policies issued by that company in the State. Any such endorsements or letters should clearly state that the company consid
ers the printout to be an original "Declaration Page". Such endorsements or letters are not necessary if the printout itself clearly states that it is an original “Declaration Page."
(7) Name and location. The policy should contain names of all the borrowers who are owners of the property being insured, and it will be returned for correction if it does not do so. The location of the property should be so described in the policy that the prop erty can easily be identified. The complete legal description of the property by metes and bounds is not required. Any deviation from the requirements of this paragraph must first be cleared with the National Office.
(8) Loss or damage covered. Buildings must be insured against loss or damage by fire, lightning, windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles, and smoke.
(9) Effective date of insurance. If there are insurable buildings located on the property, the borrower will arrange with his agent or company to have adequate insurance in force at the time the loan, assumption, or credit sale is closed so that the policy will properly insure the borrower and the mortgagees. When new buildings are erected or major improvements are made to existing buildings, such insurance will be made effective as of the date materials are delivered to the property. The County Supervisor will make no payments from loan funds for labor or materials until the borrower has furnished adequate insurance to protect the interest of the FmHA or its successor agency under Public Law 103–354 in the buildings being erected or improved.
(10) Term. The borrower will be required to furnish insurance for a term of at least one year with evidence that a full year's premium is paid. The term "premium" as used herein includes any assessments which may be charged to the borrower. If the assessments are of the type imposed only after a loss occurs involving property insured by the insurance company, then the borrower must present evidence (such as a letter from the company) that he currently does not owe any such assessments. The borrower may receive a discount for insuring for a longer period such as three years or five years and with an annual premium. If the insurance contains an automatic renewal clause, its provision should be substantially the following to be acceptable to FmHA or its successor agency under Public Law 103-354: This policy will be automatically extended for successive terms at expiration of the original term and of each extension thereof, upon payment of renewal premiums. It is a condition of this policy that if the policy expires or is canceled for nonpayment of premium, or for any other reason, the mortgagee will be given 10 days notice.
(11) Mortgage clause. The standard mortgage clause adopted by the State must be attached to or printed in the policy, or Form FmHA or its successor agency under Public Law 103-354 426-2, "Property Insurance Mortgage Clause (Without Contribution),” must be attached to or the provisions thereof printed in the policy. A letter signed by an authorized official of an insurance company to the State Director, stating that all insurance policies the company issues in the State and in which the FmHA or its successor agency under Public Law 103-354 has a mortgage interest incorporates all of the provisions of Form FmHA or its successor agency under Public Law 103– 354 426–2 may be accepted in lieu of attaching Form FmHA or its successor agency under Public Law 103-354 426-2 to each policy. If such a blanket letter is used, the FmHA or its successor agency under Public Law 103_354 will be named in the loss payable clause and a State Instruction will be issued, after prior approval is obtained from the National Office, authorizing the use of such method.
(i) If the use of a mortgage clause, other than the standard mortgage clause (without contribution), has been made mandatory by State laws or insurance regulations, a State Instruction will be issued, after prior approval is obtained from the National Office, authorizing the use of such a form.
(ii) When an approved mortgage clause is printed in the policy a “Loss Payable Clause" is acceptable provided the FmHA or its successor agency under Public Law 103-354, as mortgagee, would receive payment in case of loss even though the company would not be liable to the borrower. A “Loss
Payable Clause" which contains the statement that the mortgagee is "subject to all terms and conditions of the policy" is not acceptable.
(iii) Whenever a new mortgage clause including the interest of the FmHA or its successor agency under Public Law 103-354 is issued after the policy has been in force, the new mortgage clause must be signed by an authorized agent or officer of the company that issued the policy. Form FmHA or its successor agency under Public Law 103-354 426-6, “Transmittal of Property Insurance Mortgage Clause," may be used to transmit the mortgage clause to the insurance official.
(iv) The FmHA or its successor agency under Public Law 103-354 and all other mortgagees whose interests are insured by the policy will be shown either in the mortgage clause or in the “Declaration Page" in the order of priority of their mortgages.
(A) “United States of America (Farmers Home Administration or its successor agency under Public Law 103– 354)” will be named in the mortgage clause for direct and insured loan mortgages naming FmHA or its successor agency under Public Law 103_354 as mortgagee, whether in its own right or as trustee under a 2(1) or other agreement with a State Rural Rehabilitation Corporation.
(B) "United States of America (Farmers Home Administration or its successor agency under Public Law 103– 354), as first mortgagee or as statutory agent and insurer of such mortgagee,” will be named in the mortgage clause for insured FO mortgages naming the lender as mortgagee, whether the mortgage is held by the original or a subsequent lender or by the insurance fund or by FmHA or its successor agency under Public Law 103-354 under a trust agreement or declaration of trust.
(C) If the designation is not identical to that set forth in paragraphs (b)(11)(iv)(A) or (B) of this section, whichever is applicable, it will be sufficient if the mortgagee is readily identifiable as the Farmers Home Administration or its successor agency under Public Law 103–354.
(c) Evidence of premium payment. (1) When Form FmHA or its successor
agency under Public Law 103-354 426-2 clause can be accepted only where the is attached to or the provisions thereof amount of insurance on each insured are printed in the policy, or a blanket building is at least equal to 80 percent letter from an insurance company in- of the appropriate replacement value of corporating the provisions of Form the insured building. FmHA or its successor agency under (ii) Three-fourths' value clause. This Public Law 103-354 426–2 in all policies clause provides that the liability of the in which the FmHA or its successor company shall be limited to threeagency under Public Law 103-354 has a fourths of the depreciated replacement mortgagee interest in effect, in accord- value of the buildings covered at the ance with paragraph (b)(11) of this sec- time of the loss, not to exceed the tion, no evidence of premium or assess- amount of insurance. This clause may ment payment is required except for be accepted if the unpaid balance of the the first year of the loan. When a sub- loan is not greater than three-fourths sequent FP or section 502 RH loan is of the depreciated replacement value of made to build, buy or rehabilitate es- the building and the amount of insursential buildings an endorsement to ance is at least equal to the unpaid balthe existing policy including coverage ance of the loan and any prior liens and for the property improved will be suffi- no building is insured for more than cient.
three-fourths of its depreciated re(d) Policy restrictions. (1) Any insur- placement value. ance on essential buildings as defined (iii) Loss deductible clause. (A) For all in 81806.3 having restrictions which loans other than RRH, RCH, and LH orlimit the amount of collectable insur- ganizations this clause generally proance must meet the FmHA or its suc- vides that loss to each building to the cessor agency under Public Law 103-354 extent of the limitation is not recoverrequirements set forth below (except able. The company is liable only for for the clause described in paragraph loss to each building in excess of such (d)(1)(iv) of this section which is never limitation stated in the clause. This acceptable); otherwise, such restric- clause may be accepted where the limitions must be eliminated or modified tation does not exceed $150, or one perto afford the required protection.
cent of the insurance coverage which(i) Coinsurance clause. This clause ever is greater. In no case, however, generally provides that in consider- may the limitation on any one building ation of a reduced rate, the borrower exceed $500.00. agrees to maintain insurance on his (B) For RRH, RCH, and LH organizabuildings up to a specified percentage tion loans this clause generally pro(usually 80 percent) of their value and vides that loss to each project to the that the company will not be liable for extent of the limitation is not recovera greater proportion of any partial loss able. The company is liable only for than the amount of insurance bears to loss to each project in excess of such the specified percentage of either the limitation stated in the clause. This undepreciated replacement value clause may be accepted where the limithe depreciated replacement value or tation does not exceed the option the depreciated replacement value (ac- shown below that is chosen by the bortual cash value) of the buildings at the rower and agreed to by the Loan Aptime of the loss. When the buildings proving Official and properly annotated are insured for the specified percentage in the borrower file. The borrower and of their value, the company, in the FmHA or its successor agency under event of a partial loss, will be liable for Public Law 103-354 Official should conthe full amount of the loss not to ex- sider the economic impact to the ceed the amount of insurance. A coin- project when selecting the appropriate surance clause can be accepted only option. where the amount of insurance is at (1) Option 1–Up to one-fourth of one least equal to the specified percentage percent (0.0025) of the insurable value. of either the undepreciated replace- Maximum deductible $5,000. ment value or the depreciated replace- (2) Option 2-Up to a maximum dement value (actual cash value). For ex- ductible of $500 on any project with an ample, an 80 percent coinsurance insurable value not exceeding $200,000.
(3) Option 3—Option 1 may be chosen and increased above the maximum deductible by an amount equivalent to funds specifically escrowed in the project replacement reserve account as an offset to the increased deductible.
(4) Option 4 Option 2 may be chosen and increased above the maximum deductible by an amount equivalent to funds specifically escrowed in the project replacement reserve account as an offset to the increased deductible.
(5) The funds used to increase the deductible in Option 3 or Option 4 may be from project funds if it does not create an unsecure financial situation for the project. Also, non-project funds may be used for Option 3 or 4 and then repaid by withdrawal from the project at the rate of 75 percent of the annual insurance premium savings earned by the amount of escrow deposit, up to the amount deposited.
(6) The funds escrowed to increase the authorized deductible will be placed in the project reserve account as an increased amount in and above the amount required by the Loan Agreement/Resolution and so annotated in the borrower's accounting system.
(iv) Three-fourths' loss clause. This clause provides that the company will not pay more than three-fourths of any loss, nor more than three-fourths of the amount of insurance in force. This clause is never acceptable and must be eliminated.
(v) Deferred loss payable clause. This clause provides that, if the amount payable under the policy for any loss to any building insured shall be in excess of a specified portion, (usually 60 percent) of the amount of insurance on such building, the company will withhold from its initial loss payment any sum in excess of the specified portion of the amount of insurance on such building. If the building sustaining such loss is repaired or replaced within six months from the date of the fire and at or within 300 feet of the original location, as described in the policy, the company upon receipt of evidence to that effect from the insured will pay the full balance withheld from the initial payment, provided the amount expended in repairing or replacing the building damaged or destroyed will equal or exceed the amount of loss as
determined under the terms of the policy. Failure to repair or replace any insured building within the time and manner provided will constitute acceptance of the initial payment as full and final settlement under the policy with respect to the loss. This clause may be accepted if the amount of insurance is for the full depreciated replacement value (actual cash value) of the building and the unpaid balance of the loan and any prior lien(s) is not greater than the initial loss payment made by the company.
(vi) Construction specifications and use conditions. If the insurance policy contains clauses which specify certain standards of construction or prescribes certain uses of the property for the insurance to be valid, the policy is acceptable only if the property meets such specifications or conditions at the time of acceptance. For example, if the policy provides that the chimney be constructed of a certain type of material, the County Supervisor should be assured that the required material has been used, or if the policy provides that farming operations are not carried out on the premises he should be assured that this condition is met.
(2) Policies generally will not be accepted if, under the terms of the policies or local laws, contributions or assessments may be made against the FmHA or its successor agency under Public Law 103–354. However, policies which impose assessments on the borrower may be accepted only if the FmHA or its successor agency under Public Law 103–354 mortgage will be recorded prior to any failure of the borrower to pay any such assessments. Policies also will not be accepted if, by their terms or other conditions, loss payments are contingent upon collective action by the Board of Directors, or the stockholders, or the members.
(e) Buildings on leaseholds. The policy will indicate that the insured is the lessee or tenant and not the owner of the buildings securing the FmHA or its successor agency under Public Law 103– 354 loan; or, if he is the owner of the building on the leased land, the policy will indicate that the insured is the owner of the building, but not of the land. State Directors, with the advice
of the OGC will issue State Instruc- $7,000, and that required on an essential tions to meet any other special re- building valued at $6,400 would be quirements needed to conform with the $6,000. insurance requirements of the State to (2) When the unpaid balance of the enable leaseholders to obtain property loan is less than the sum of the depreinsurance for buildings which are secu- ciated replacement value of the essenrity for FmHA or its successor agency tial buildings to be insured, the total under Public Law 103354 loans.
amount of insurance must be at least (7 U.S.C. 1989; 42 U.S.C. 1480; 40 U.S.C. 442; 42 equal to the lesser of (i) the unpaid bal. U.S.C. 1480; 42 U.S.C. 2942; 5 U.S.C. 301; Sec. ance of the loan, or (ii) the cost of ade10 Pub. L. 93–357, 88 Stat. 392; delegation of quate essential buildings which can be authority by the Secretary of Agriculture, 7 constructed for amounts less than the CFR 2.23; delegation of authority by the As
depreciated replacement value of the sistant Secretary for Rural Development, 7 CFR 2.70; delegations of authority by Direc
existing buildings to be insured. tor, OEO, 29 FR 14764, 33 FR 9850)
(3) When, by the use of loan funds or (41 FR 34571, Aug. 16, 1976, as amended at 41
otherwise, buildings are erected or sub FR 49990, Nov. 12, 1976; 42 FR 33262, June 30,
stantial improvements are made to es1977; 43 FR 56013, Nov. 30, 1978; 44 FR 45115, sential buildings, the amount of insurAug. 1, 1979; 51 FR 17921, May 16, 1986; 54 FR ance will be adjusted in accordance 35869, Aug. 30, 1989; 56 FR 6945, Feb. 21, 1991)
with paragraphs (a)(1) or (2) of this sec
tion, whichever is applicable. g 1806.3 Coverage requirements.
(b) Loans secured by other than first The County Supervisor should en
liens. The amount of insurance on courage the borrower for his own pro
buildings in the case of FmHA or its tection to insure for their depreciated
successor agency under Public Law 103 replacement value (actual cash value)
354 loans secured by other than a first all essential buildings. Essential build
lien will be the same as required in ings include the dwelling and any other
paragraph (a) of this section, with the buildings that are necessary for the op
understanding that the unpaid balance eration of the property or that provide
of the loan will be deemed for this purincome to assure orderly repayment of
pose to be the amount of the total real the loan. If insurance is for less than
estate mortgage indebtedness owed all the depreciated replacement value of
prior mortgagees named in the mortall essential buildings, the County Su
gage clause, plus the debt to the FmHA pervisor will see that the coverage is
or its successor agency under Public obtained on one or more of the most es
Law 103–354 which is secured by real esThe minimum
tate mortgage. amount of coverage will be furnished as
(c) Exception of buildings from insurprescribed below: (a) Loans secured by a first lien. (1)
ance. (1) Insurance will not be required When the unpaid balance of the FmHA
on a building: or its successor agency under Public
(i) That is not essential. Law 103_354 loan secured by a first lien
(ii) In such a state of disrepair that is equal to or greater than the depre- the cost of insurance would be prohibiciated replacement value of the essen
tive. tial buildings, or the cost of adequate
(iii) Which has a depreciated replaceessential buildings which can be con
ment value of $2,500 or less. structed for amounts less than the de- (iv) Which is being or has been repreciated replacement value of the ex- paired with a section 504 loan of $7,500 isting buildings, the essential buildings or less. Families receiving section 504 will be insured, to the nearest multiple loans should be encouraged but not reof insurance that is available, for the quired to carry insurance on their lesser of (i) their depreciated replace
home. ment value, or (ii) the cost of con- (v) On LH security property which structing adequate essential buildings. was not built or repaired with FmHA For example, if insurance is available or its successor agency under Public in only multiples of $1,000, the mini- Law 103-354 loan funds provided that mum insurance required on an essen- the State Director determines that the tial building valued at $6,600 would be land and other structures adequately