Detached Garage but no Primary Residence

I have an interesting one that came up today, and would like to know if others agree/disagree that the detached structure exemption can be used on this.

Borrower paid cash and purchased a property right behind his residence. This is a residential neighborhood. He's now getting a loan secured by that property to reimburse himself for the cash paid - only secured by that property - not secured by the parcel with his home. On this property is a gorgeous pool, gazebo, and a 1400 sq ft tool shed/garage - yes, it truly is that per the appraiser and the pictures in the appraisal - it's not at all a residence. The garage is in a flood zone. There is no residential structure on the property, but it's zoned residential, and it will be used for personal, family or household purposes. So, with that said - can you use the detached structure exemption?

Residential Property: A property that is used primarily for personal, family or household purposes, and not used primarily for agricultural,
commercial, industrial or other business purposes.

Detached: A structure is “detached” from the primary residential structure if it is not joined by any structural connection to the residential structure.

Given that, it seems it would be. However, since there's no residential structure on the property, it's not covered under a residential flood policy (like you'd normally have - if the customer had a flood policy on the house, it would cover the detached garage, I believe.

339.2 - Definitions

Residential improved real estate means real estate upon which a home or other residential building is located or to be located.

339.4 - Exemptions

(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.

Based on those regulatory cites I would have to opine the property is not a residential improved property and would not be eligible for the exemption.

Thank you, Dan!

It was in the FDIC materials related to this. The insurance agent was the one saying that his client didn't need flood insurance, and he referred to this and this stating we were incorrect in requiring insurance. We've since asked him for proof then that it's a covered detached structure in the residential flood policy, but I don't think he'll be able to produce that - this property does back up to the borrower's residential property, but it's a separate parcel.

this property does back up to the borrower's residential property, but it's a separate parcel

I can understand the "logic" but under the regulation the loan is not secured by residential improved real estate since as you said it is a separate parcel and based on that the property IMO is not eligible for the exemption.

Thank you!

I was reading again this final rule from Biggert-Waters which includes all of the discussion on detached structures. The references for what isn't included are those used for business and agriculture purposes (and anything used as a residence, of course). This structure/property is absolutely not business or agriculture purpose - it's a residential neighborhood, and this property has a pool, gazebo, and a garage with tools - no home, but plans to raze the garage and build a luxury home (this is even stated in the appraisal as this is a common occurrence in this neighborhood to raze anything on the properties and build luxury homes). So, when you look at this property - it's clearly a personal, family, household use and not at all commercial or ag. BUT, agree, there's no residential structure for the garage to be detached from.

I'm glad you posted this question, interesting exercise on detached structures.

It is just such a unique situation that I hadn't come across before. If you saw the appraisal, you'd be surprised! It truly looks like the back yard to a luxury home - gorgeous pool, and full outdoor kitchen cabana (no walls), but there's no home. The agent did provide us documentation that the property is listed in the borrower's home owner's insurance policy as additional premises; however, the home isn't in a flood zone, so it doesn't require flood insurance and the borrower doesn't have flood insurance on it. I ended up submitting the question to our examiners. I don't want to dig my heels in with the insurance agent and customer if it's not necessary, but definitely don't want a violation over it either.

The insurance agent and borrower have no say in the matter. Just because there may be an exception from the "mandatory" purchase rules for a detached structure, it does not mean that a lender is bound by it. If this detached structure is in a flood zone and you want it insured for flood from a safety and soundness perspective, than that is a condition of the loan and they can provide it or walk. Since this property is your only collateral - if the structure significantly contributes to the collateral value, you would be foolish not to require it, regulation or not.

I will be interested to hear what the examiners say but as Randy stated the borrower and insurance agent have no say when it comes to the bank requiring flood insurance.

Based on the regulatory definitions I provided and the fact you do not have the residence as security how are you justifying to the examiners the loan is secured by residential improved real estate?

I completely understand both of your comments for sure! This is one of those situations where the value is in the land, the structure was given no value in the appraisal, and the borrower intends to remove the structure at some point - just not in time for loan closing. The loan officer doesn't see a need since the value is in the land securing the loan - not the garage.

What is the insurable value of the structure?

Staff is in the process of trying to determine the insurable value. It's not in the appraisal, not in the documents provided by the insurance agent thus far, and the CAD lumped all improvements on the property as one value (the pool and cabana/outdoor kitchen are not in the flood zone - just the garage is).

the borrower intends to remove the structure at some point -

When it come to requiring flood insurance keep the following in mind when there is a building located on the property that requires flood insurance.

If the building requiring flood insurance would fall down if you leaned against it your options are:

1. Require flood insurance before closing the loan
2. If borrower refuses to cooperate in getting flood insurance don't make the loan.
3. Have someone lean aganist the building before making the loan.

First, I want to reiterate what Randy said in his first post. Even IF this qualified for the detached structurer exemption, the lender does not have to "waive" insurance. It's an option. The lender can always require insurance.In fact, the FRB memo the agent quoted from states:
Although detached structures are exempt from the mandatory purchase of flood insurance, lenders may nevertheless require flood insurance on a detached structure to protect the collateral securing the mortgage.

I would contact the agent and explain to them that this is NOT their "call", and the agent should never tell a borrower that they don't have to get insurance under this scenario. Depending on how that conversation went, I might report them to the state insurance commission.

Second, here's how we spell it out in our Flood Insurance training manual:

G. Detached Structure Exemption [§339.4(c)]:
A bank does not have to require flood insurance for qualifying detached structures that do not serve as a residence. However, lenders should account for any safety and soundness considerations. [Effective 10/1/15]

1. Qualifications:
Each of following must be met:

a. Multiple Buildings:
There must be more than one building on the property.

b. Residence Structure:
One building must serve as a residence (sleeping, bathroom or kitchen facilities).

c. Structure Purpose:
The detached structure(s) must be used primarily for personal, family, or household purposes. However, it cannot serve as a residence (sleeping, bathroom or kitchen facilities).


2. Loan Purpose vs. Structure Purpose:

a. Loan purpose DOES NOT matter.

b. Structure purpose DOES matter.

-----------------------------

I hope that helps with your understanding of this requirement.

Last, I can see the position that this property is now part of your borrower's residential property. I don't see anything in the regulation that addresses separate lots. I haven't dug into the Act itself, but I do think there's room for interpretation here. IF you wanted to exempt the purchase of flood insurance, I would look at the Act to see if there's any guidance on separate parcels that are joined together. I don't think there is. Here's a link to the Federal Register:
https://www.federalregister.gov/doc...ns-in-areas-having-special-flood-hazards

David,

Since they are not also taking the property that contains the house as collateral, then I believes it fails one of your tests that you developed.

a. Multiple Buildings:
There must be more than one building on the property.

If they were taking both lots that included the residential structure, then I would have no problem with applying the exemption - multiple lots or not.

Last, I can see the position that this property is now part of your borrower's residential property.

David the problem I have with this assumption is the loan is secured by a separate lot that does not contain a residential structure.

If the loan was secured by both properties then I could go along with that assumption and maybe support the exemption for the garage; but in this scenario I just don't see the property securing the loan being eligible for the exemption.

Thank you all for your input! I absolutely agree the agent cannot dictate what we do - I've had more times than I can count where I've argued with insurance agents about flood insurance and had to just dig my heals in - it's not fun, but we do it.

I did tell the loan officer last night that short of hearing back differently from OCC, we would require the insurance. This is one of those situations, too, where, truly, all the value is in the land, the loan amount is less than the land is even valued at, and the loan officer has given no consideration at all for the little value of the garage in making this loan - the lender will not require insurance in cases like this unless it is actually required - they didn't need the parcel with the house to make this loan, so they didn't take it as collateral. Given that, especially with the insurance agent telling our borrower we are requiring more than the law requires, it makes it just more challenging both with us talking to the loan officer, but also the loan officer discussing it with the borrower.

Given that, especially with the insurance agent telling our borrower we are requiring more than the law requires,

If the agent has done this then I would take David's suggestion and report him to your state's DOI.

This thread (especially Dan's comment) reminds me of a discussion from a few month's back:

Q: We have a borrower looking to purchase a property that has an old, run-down building with no contributory value. The property is in a flood zone and I mentioned to the lender that we, the bank, could require insurance in the amount equal to the "demolition value" of the property. Whenever you guys have used that value in the past as the minimum insurance amount required, what evidence did you use to support that value? An appraiser opinion or something else? We have never actually had this come up in real-life at our bank, only pretend.

David Dickinson's response (only the first part):

It's always $26.50. That's the price of a gallon of gas, a match and case of beer.

Randy stated: Since they are not also taking the property that contains the house as collateral, then I believes it fails one of your tests that you developed.

a. Multiple Buildings:
There must be more than one building on the property.

If they were taking both lots that included the residential structure, then I would have no problem with applying the exemption - multiple lots or not.

Dan stated: David the problem I have with this assumption is the loan is secured by a separate lot that does not contain a residential structure.

If the loan was secured by both properties then I could go along with that assumption and maybe support the exemption for the garage; but in this scenario I just don't see the property securing the loan being eligible for the exemption.


Both of you made the same point and I don't disagree. I knew I was stretching this. Just throwing it out as a possibility but when I hear both of you state your opinions, I agree.

Last, rainman stated . . . well rainman actually quoted me, so I really like that reply the best.