Published on: January 20, 2009
Lenders financing a condominium purchase typically and understandably require basic information about the community association’s governance and finances, which association managers have provided more or less willingly for many years. But what had been a reasonably smooth process has turned bumpier of late. More lenders are refusing to accept the standardized form most Massachusetts managers have been using for more than a decade, insisting that managers complete the lenders’ own questionnaires instead, and increasingly seeking information the standard form doesn’t include.
These personalized requests, which used to be occasional, have become more frequent — more a trickle at this point than an avalanche, but still a noticeable trend. And some managers are beginning to object, both about the time required to compile or reformat the information and about the liability they may incur if the information they provide is incorrect. A few are now questioning why managers should have to provide the information to begin with, since it is the condominium buyer, not the association that is obtaining the loan. A bit of history may be useful.
Like many business traditions, this one —managers providing condominium information to lenders —probably began as an ad hoc practice, formalized by repetition and the passage of time. The best guess is that lenders seeking documentation for condominium loans gave their list of questions first to the buyer or the real estate broker handling the transaction, who, in turn, passed it on to the association’s board or manager, to whom the information was more readily accessible. Managers, as a courtesy to owners trying to sell their units, answered what were, at one time, a relatively small number of questions.
As the lending process became more complex, that list of questions grew longer and more detailed. But the assumption that managers would provide the answers was fixed and remained fixed, even though meeting the information demands became more difficult and more time consuming as home buying activity increased and as lenders developed multiple questionnaires, seeking similar, but not identical, information in a variety of different forms.
Tipping Point and Resolution
The difficulties reached something of a boiling point about 12 years ago, when a manager was sued over an incorrect answer to a lender’s oddly-worded question about special assessments. In response, our office developed a standardized form to streamline the information gathering and reporting process for managers. The form also addressed liability concerns by including a disclaimer, noting that the manager and association trustees don’t guarantee the accuracy of the information provided and suggesting that the lender should independently verify the information. This is the form that most Massachusetts managers use today, a version of which has been adapted for the automated, on-line documentation retrieval and certification service provided by CondoCerts. Why are some lenders now rejecting a form they have accepted without complaint for more than a decade?
New Rules — More Questions
The proximate cause —at least the obvious one – appears to be changes in the secondary market underwriting requirements for condominium loans, announced last year by Fannie Mae. A reaction to massive and still mounting delinquencies and foreclosures (and the lax credit standards responsible for them), the new guidelines (duplicated, with a few variations, by Freddie Mac) require lenders to obtain more information about the condominiums they finance. Specifically, the rules require lenders to certify, among other standards, that:
· The community association is allocating a minimum of 10 percent of revenues annually for its reserves;
· No more than 15 percent of the units are delinquent by more than one month in the payment of common area expenses; and
· Owners have HO-6 insurance policies if the association’s master policy does not provide “all-in” coverage.
The forms managers currently use do not address those issues, which explains why more lenders are requesting the information separately, but not why some are insisting that managers complete the lenders’ questionnaires, even when they duplicate the information on the industry’s standard form. My guess is these lenders are reacting, nervously, to indications that Fannie and Freddie will be stickier about the loans they purchase and quicker to require lenders to buy them back if they go bad.
Managers are responding to these requests as they have in the past by trying to balance a desire to accommodate sellers (and avoid annoying the association boards to which managers report) against the need to limit their liability risks. Those risks are real and serious. Answering basic questions requiring objective and readily available information — the number of units, the level of investor-ownership, age of the community, percentage of rental units —is fine. That’s the kind of information provided in the standard form managers use, which can easily be revised to include the delinquency and reserve contribution information Fannie and Freddie are now requiring.
Other questions are more problematic. One manager complained recently that a lender was asking if the community complies with local zoning requirements (“How do I know?” he asked); if the condominium could be expanded in the future (“Maybe, maybe not”); and if the association has a right of first refusal on unit sales that might interfere with the lender’s rights following a foreclosure. These questions can’t be answered with a yes, a no, or a number based on the manager’s knowledge of the community and its governing documents. They require research, analysis and in some cases come perilously close to requiring a legal interpretation of what the documents say. Fannie’s new question about whether owners have appropriate insurance policies falls clearly into this problem category, as condominium documents are notoriously hazy (and sometimes silent) in their description of the insurance coverage community associations are required to purchase.
Most managers say their policy is to provide only the basic information included on their standard form or on the form lenders can download from CondoCerts, if the association subscribes to that service. But some managers acknowledge that they will bend that policy to accommodate sellers “who ask nicely” or to preserve a transaction that might be jeopardized if the manger refuses to fill out the lender’s form. Bending in this way can be dangerous, however, because information provided outside of the industry’s form won’t be covered by the disclaimer language, which shifts responsibility for verifying the information’s accuracy to the lender — where it should be.
For some managers, the issue is no longer which questions they should answer, but whether they should have to answer any questions at all. Lenders have to provide the information Fannie and Freddie require (or they won’t buy the loan), but managers have no relationship with the lender or the buyer and no obligation to provide the information they require – certainly no obligation to do additional research or to format the information in a special way. Lenders should do their own due diligence, these mangers argue; they shouldn’t expect association mangers to do it for them.
Perhaps not. But the fact is, lenders (sellers and association boards) do expect managers to provide this information; they’ve been providing it for years and the expectation that they will continue to do so is unlikely to change. On the contrary, it appears that lenders are going to become more, not less demanding as Fannie and Freddie increase their focus on managing risks and reducing loan losses, and lenders respond to the expanded and more detailed condominium certifications Fannie and Freddie are requiring. Managers may be able to argue convincingly that this due diligence is the obligation of lenders, but how many mangers want to have that argument with an owner who is unable to sell a unit or refinance an existing loan, or with the condominium board that is being pressured by those owners to provide information lenders are demanding as a condition of approving a loan?
Managers may be justified in drawing hard lines on lender information requests, but they will be hard-pressed to do so. What mangers and association attorneys can do is a better job of explaining to lenders why it is difficult or impossible to accommodate some of their information requests. We’re working on creating a forum in which lenders and managers can discuss their respective information needs and liability concerns and work together to create a revised questionnaire that works for both groups — providing the information lenders need without increasing the work load or the liability risks of mangers and community associations.
That is likely to be a long process, however. My conversations with lenders and lender attorneys indicate that the current trickle of lenders insisting on custom questionnaires is likely to grow. At some point, Fannie and Freddie will have to be engaged in the debate between lenders and managers about what information is required, who should provide it, and in what format it will be acceptable. Ideally, Fannie and Freddie should sign off on a redesigned questionnaire, as they did a few years ago on the format CondoCerts developed for its on-line service.
In the meantime, managers should have lenders specify the questions the industry form does not answer, and then check with the association’s attorney to determine which of those questions, if any, the mangers can answer accurately and safely without incurring liability risks. Managers will have to determine how much additional work is required to provide the information and how much they should charge for the service, recognizing that those costs may include attorneys’ fees for questions that managers can’t answer confidently and shouldn’t try to answer at all.