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#2205297 - 02/06/19 11:06 PM Builder revolving master line - MIRE event?
AT Offline
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Joined: Nov 2012
Posts: 15
We are trying to determine when a triggering event would occur in the below scenario...

We have some builders with a master revolving line of credit for the purpose of purchasing lots and the construction of a specified number of homes. The lines renew annually. The bank must approve the funding of each lot/home under the line separately. The portion of the line allotted to the construction of each home is booked as a separate loan in our system. The initial flood requirements (determination, borrower notice, etc...) are all triggered by the individual construction loans, not the master line. There is no note created for the individual construction loans (only a settlement statement).

The master line agreement states that individual homes should be completed within 12 months from the date construction begins (loan is booked). If still under the line after 18 months, a principal pay down is required, and again at 24 months. If still under the line after 24 months, then converted to a 15 year fixed loan.

When the individual loans are booked, they have an initial 12 month term. The Loan officer will review prior to the maturity date and if balance remains and no occurrence of default, then will automatically extend the maturity date by 6 months, until 24, when it is converted.

Questions:
-Would the annual renewal of the master revolving line to the builder be a MIRE event?

-For the extensions of the individual construction loans , would these be a MIRE event or would the OCC's guidance issued in 2017 on automatic extensions apply?

We have both sides being argued and any help would be greatly appreciated!!

Quote:
OCC Interpretive Letter# 1156 -
"...Based on the OCC’s review of this issue, the OCC concludes that an automatic extension of a credit facility that is agreed upon by the lender and the borrower at the origination of the loan and memorialized in the credit agreement does not constitute a “make, increase, extend or renew” (MIRE) event that would trigger the federal flood insurance requirements because the automatic loan extension was contemplated in the loan agreement.

Your letter indicates that some commercial credit facilities provide for one or more automatic extensions of the credit facility, which are agreed to by lenders and borrowers at the origination of the loan and memorialized in the credit agreement. For example, the credit agreement may have an initial loan term of three years and the borrower has the right to extend the agreement one or more times, each for an additional one-year period. Your letter sets forth the view that such automatic extensions are not new extensions of credit. Your letter further indicates that automatic extensions are an integral part of the origination of the loan, and that exercising the extension is at the borrower’s option.

...Based on the OCC’s review of this issue, an automatic extension of a credit facility that is agreed upon by the lender and the borrower at the origination of the loan and memorialized in the credit agreement does not constitute a MIRE event that would trigger the federal flood insurance requirements because the automatic loan extension was anticipated in the original loan agreement. "

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#2205301 - 02/06/19 11:24 PM Re: Builder revolving master line - MIRE event? AT
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 79,643
Galveston, TX
You say: There is no note created for the individual construction loans (only a settlement statement).

So a MIRE would only happen in relationship to the master line. Not how you treat basically what would be considered individual sub-draws.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2205305 - 02/07/19 12:03 AM Re: Builder revolving master line - MIRE event? AT
AT Offline
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Joined: Nov 2012
Posts: 15
Randy

That is what I thought you might say. can you tell me your thoughts on the following:

-when establishing new revolving line - assuming no collateral at the time of closing, not a triggering event since it is not a "designated loan"

-As collateral is added to the security agreement - triggering event occurs and determination must be pulled and notice provided before adding the property.

-increasing, renewing, or extending the master revolving line - triggering event for flood requirements and applicable to any properties currently securing the line of credit.

Also, related to this... when determining the required amount of coverage (lesser of the 3), the loan amount being used is the allotted amount for the property, which is the amount booked for the individual loan. Would this be acceptable?

Ex.
Master line of credit = $5,000,000
individual loan booked for construction of single family home at 123 main street - loan amount = $157,000
RCV = $200,000

Would you say minimum amount required is $200,000 or $157,000?

thanks in advance!!
Last edited by N; 02/07/19 12:04 AM.
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#2205307 - 02/07/19 01:11 AM Re: Builder revolving master line - MIRE event? AT
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 79,643
Galveston, TX
The loan/line is for $5MM. So you have one property in a SFHA with an RCV of $200K, The collateral of $200K is securing the entire line, not just the $157,000 draw that you advanced on that specific property. Therefore, if the current line is advanced at $200K or greater, then your flood insurance requirement is $200K.

It is no different is you take 4 properties on closed-end loan for $5MM and one property is in a SFHA with an RCV of $200K. You have to have $200K of flood insurance on that property.

Since these are new construction to a builder and are not a primary residence yet, the actual value is the ACV and not the RCV, but since they are brand new, there would be no depreciation. So the ACV and the RCV would be the same.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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