Q: Our manager recently told the board that there has been a change with “bank requests” and said the board needed to address it. I did not understand what that means or what the changes are. Could you please explain? (A.M., via e-mail)
A: Needless to say, as a result of the tragic condominium building collapse last year, there has been intense recent focus on many issues in the condominium industry, including disclosure. One issue getting a lot of attention is the “Lender Questionnaire,” which is sometimes confused with the “Estoppel Certificate.”
The Estoppel Certificate has historically been used to require the association to certify and prorate assessment obligations at a closing. That law was amended a few years ago to require some additional disclosures in the Estoppel Certificate, such as whether the association has a right of first refusal, whether there are pending rule violations, and what the parking arrangements are. The law requires an association to complete and return Estoppel Certificate requests within a certain timeframe.
The Lender Questionnaire is a different document. When a potential purchaser wants to borrow money (“take out a mortgage”) to buy a condominium unit, the bank which lends the money often “sells the loan” on the “secondary mortgage market.” The “secondary mortgage market” has several entities that buy mortgages, the largest being the Federal National Mortgage Association (“Fannie Mae”).
Before approving a loan request, the bank will usually want to know if they can sell the loan, and therefore send a Lender Questionnaire to the association. These Questionnaires ask a variety of questions to determine whether the project complies with the applicable secondary mortgage market guidelines. Secondary mortgage market guidelines address the keeping of reserves, internal bookkeeping controls, whether there are hotel or commercial operations, whether the property is used for transient rentals, and numerous other topics.
In light of recent events, Fannie Mae is now requiring information regarding maintenance and engineering inspections. The emergence of requests for this information, and the gravity of the underlying subject, has sent some tremors through the industry.
The Florida Condominium Act was amended in 2003 to state an association is not required to provide a prospective lender with information about the condominium, other than information or documents specifically required by the statute, which presently does not include maintenance or inspection related items. The law also states that associations can respond to such requests, permits a processing fee of up to $150.00 (plus the reasonable cost of photocopying and any attorneys’ fees incurred by the association in connection with the response), and provides certain limitation of liability language provided that certain procedures are followed.
In my experience, though often considered a nuisance by boards and managers, many associations have historically cooperated in completing Lender Questionnaires to facilitate loan availability in the condominium. The question being wrestled with is whether these market changes tip the scales or should affect your board’s current practices.
This is not a question with an obvious nor one size fits all answer. I have heard some attorneys say, “just don’t do it,” and that is certainly the safest approach from a risk management standpoint. But, if that results in loans not being available to purchase units in the condominium, there is a legitimate question as to whether property values could be impacted.
I have conversely heard some attorneys argue that since the statute confers a level of immunity from liability, “there is nothing to worry about, just keep on doing it.” In my view, that point of view is ill advised at best. I have yet to see protections granted by a statute that a clever lawyer will not be willing to argue around.
Insurance coverage for errors and omissions, the practices and role of your management company, what the management contract says about hold harmless obligations, and several other issues will all play a role in the board navigating this “new normal.”
As they say, “don’t try this at home.” Make sure the association’s legal counsel is familiar with the issues, your community, and is sufficiently engaged to assist the board in choosing what may well be the lesser of the evils.
Joseph E. Adams is a Board Certified Specialist in Condominium and Planned Development Law, and an Office Managing Shareholder with Becker & Poliakoff. Please send your community association legal questions to jadams@beckerlawyers.com. Past editions of the Q&A may be viewed at floridacondohoalawblog.com.