I. Purpose: In recent years, numerous third-party home warranty plans have been developed offering new homeowners varying degrees of protection against builder default and/or major structural defects in their homes. This exhibit establishes the criteria and procedures by which a warranty plan is found acceptable for new construction of single family homes financed by Rural Development. An acceptable warranty plan will:
A. Assure that Rural Development borrowers receive adequate warranty coverage,
B. In certain circumstances, eliminate the requirement for Rural Development personnel to make the first two construction inspections, and
C. Permit a loan up to the market value of the security (less the unpaid principal balance and past due interest of any other liens against the security), even though Rural Development personnel may not have performed periodic inspections during construction.
II. Types of Warranty Companies.
A. An insured warranty company is underwritten by an insurance carrier, licensed to operate as an insurer by the states where the warranty company plans to operate, and has an acceptable rating from a nationally recognized rating company such as A. M. Best Company.
B. A risk retention group is an insurer which is licensed in one state and is authorized, under the Products Liability Risk Retention Act of 1981, to issue its policies in all states. This authority is not challenged by Rural Development; however, there remains some question as to the legal propriety of a 10-year insured warranty insurer to be a risk-retention group. If at some future time any state insurance commission or regulatory agency challenges the legal authority of such group, Rural Development will reconsider its acceptance of the group.
C. Individual state warranty plans, such as that offered by the State of New Jersey, are backed by the full faith and credit of the state government.
III. Plan Requirements
To be considered acceptable, a warranty plan must include the following features:
A. The entire cost (fee, premium, etc.) of the coverage is prepaid and coverage automatically transfers to subsequent owners without additional cost.
B. The coverage is not cancellable by the warrantor (builder), warranty company or insurer.
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RD Instruction 1924-A
C. The coverage includes at least the following:
(1) For one year from the effective date, any defects caused by faulty workmanship or defective materials.
(2) During the second year after the effective date, the warranty continues to cover the wiring, piping and duct work of the electrical, plumbing, heating and cooling systems, plus the items in (3).
(3) During the third through the tenth years, the warranty continues to cover minor structural defects. A minor structural defect is actual damage to the load-bearing portion of the home including damage due to subsidence, expansion or lateral movement of the soil (excluding movement caused by flood or earthquake) which affects its load-bearing function and which vitally affects or is imminently likely to affect use of the home for residential purposes.
D. A system is provided for complaint (claims) handling which includes a conciliation and, if necessary to resolve matters in dispute, arbitration arranges by the American Arbitration Association or similar organization.
E. A construction inspection plan is required if Rural Development is to eliminate the first two Rural Development inspections or permit a full market value loan when Rural Development inspections are not conducted.
IV. Information for Review.
A. Companies submitting warranty plans for a determination of acceptability must support requests with the following information.
(1) Evidence that the insured warranty company has met the applicable state licensing and/or regulatory requirements in the state in which the company plans to operate.
(2) Evidence that the insurance carrier underwriting the warranty plan is licensed to operate as an insurer in the states in which the company plans to operate and has an acceptable rating from a nationally recognized rating company such as A. M. Best Company.
(3) State warranty plan agencies will provide evidence that the plan is backed by the full faith and credit of the state.
RD Instruction 1924-A
(4) A full description of the warranty plan including information on the fees, builder and home registration procedures, required construction standards, construction inspection procedures, coverage provided and claims procedures.
(5) A sample copy of the warranty information and/or policy which is provided to the homeowner.
(6) Suggested means by which Rural Development field offices can readily assure that the builder is a member in good standing prior to loan approval and that a warranty will be issued upon the completion of construction prior to the final release of funds.
B. Submission and Acceptance.
(1) Insured warranty companies, except those operating as risk retention groups, and state warranty plan agencies will submit their requests and supporting information to the Rural Development State Director in the state in which they plan to operate. State Directors will determine the acceptability of insured warranty plans and state warranty plans in their jurisdictions, notify the company or agency of the decision in writing and notify field offices by issuance of a State Supplement including the names and addresses of acceptable warranty companies and any other pertinent information.
(2) Warranty companies claiming authority as risk retention groups will submit their requests and supporting information including certification that it has complied with all requirements of the Products Liability Risk Retention Act of 1981 (Public law 97-45) and information indicating the state in which it is licensed, information to the Rural Development National Office, Single Family Housing Processing Division. The National Office will determine the acceptability of the warranty of a risk retention group, notify the company of the decision in writing and notify field offices by issuance of an attachment to this Exhibit.
V. Warranty Performance.
A. County Supervisors will report inadequate warranty performance through their District Director to the State Director. State Directors will review the situation, assist in resolving any problems and, if necessary, initiate action under Subpart F of Part 1924 of this chapter. State Directors will inform, by memorandum, the Director, Single Family Housing Processing Division, National Office, of any problems with warranty performance and if any debarment action is initiated.
B. State Directors will annually monitor each warranty company and/or its insurer to assure continued compliance with state licensing and/or regulatory requirements.
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RD Instruction 1924-A