When Fidelity/Crime Insurance Is Required
If you're buying a condo or co-op unit, your lender will check whether the project needs fidelity/crime insurance. This insurance protects against theft or fraud by people who handle the building's money.
Most condo and co-op projects must carry this coverage. The main exceptions are small projects with 20 units or fewer, projects that need coverage of $5,000 or less, and certain projects that qualify for streamlined review processes.
Say you're buying into a 50-unit condo building. Your lender will verify that the homeowners association has fidelity/crime insurance covering anyone with access to the HOA's funds. This includes board members, property managers, and management company employees.
What the Insurance Must Cover
The coverage must protect against dishonest or fraudulent acts by anyone who handles or controls the HOA or co-op's money. This applies whether that person gets paid for their services or volunteers.
The policy must specifically cover the management agent if one handles the building's finances. A separate policy held by the management company alone won't satisfy this requirement.
For example, if your building uses ABC Property Management to collect assessments and pay bills, the HOA's fidelity/crime policy must cover ABC's employees. ABC might have its own coverage, but that doesn't replace the requirement for HOA-owned coverage.
How Coverage Amounts Are Calculated
The required coverage amount depends on the financial controls the HOA or co-op has in place. Lenders look for three specific safeguards:
- Separate bank accounts for operating funds and reserves, with bank statements sent directly to the HOA
- Management company maintains separate accounts for each client and cannot access reserve funds
- Two board members must sign any checks drawn on the reserve account
If the project follows one or more of these controls, the minimum coverage equals three months of assessments for all units. If none of these controls exist, coverage must equal the maximum amount of money ever in the HOA's custody at any time.
Consider a 100-unit condo where each owner pays $300 monthly in assessments. Three months of total assessments equals $90,000. If the HOA follows proper financial controls, $90,000 in fidelity/crime coverage would meet the minimum requirement.
Required Documentation
Your lender will need to verify the insurance coverage through specific documents. The most common evidence includes:
- Current fidelity/crime insurance policy or certificate
- HOA or co-op bylaws and management agreements
- Financial statements showing assessment amounts and reserve balances
- Bank account documentation proving separate accounts exist
The lender will review these documents to confirm the coverage amount meets Fannie Mae requirements and that the HOA or co-op corporation is listed as the named insured.
Why These Rules Exist
Fannie Mae requires fidelity/crime insurance because condo and co-op projects involve shared financial responsibility. When dozens or hundreds of owners contribute to common expenses, significant amounts of money flow through the association.
Without proper insurance, theft or fraud by someone handling these funds could create financial hardship for all owners. This might affect their ability to maintain the property or pay their mortgages, creating risk for lenders.
The financial controls that reduce required coverage amounts represent best practices that make theft less likely. Projects with strong financial oversight pose less risk, so Fannie Mae allows lower insurance minimums.
Common Issues and Complications
One frequent problem occurs when management companies carry their own fidelity/crime insurance but the HOA doesn't have separate coverage. The management company's policy protects the company, not the HOA, so it doesn't satisfy Fannie Mae requirements.
Another issue arises when projects calculate coverage amounts incorrectly. Some associations base the calculation on monthly operating expenses rather than total assessments, leading to insufficient coverage.
State laws can also complicate matters. Some states have their own fidelity/crime insurance requirements that differ from Fannie Mae's rules. In these cases, Fannie Mae accepts the state requirements instead of its own.
Projects sometimes struggle to document their financial controls adequately. If the lender can't verify that proper safeguards exist, the project must carry the higher coverage amount based on maximum funds in custody.
Special Situations
New construction projects may face timing challenges with insurance requirements. The developer typically handles initial insurance arrangements, but coverage must transfer properly to the HOA once unit sales begin.
Co-op projects have additional complexity because shareholders don't own real estate directly. The co-op corporation owns the building, and the fidelity/crime insurance must reflect this ownership structure.
Projects undergoing conversion from rental to condo or co-op ownership need careful attention to insurance transitions. Coverage that worked for the rental property may not meet the requirements for the new ownership structure.
References
For the official guidelines, see B7-4-02: Fidelity/Crime Insurance Requirements for Project Developments in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B7-4-02, Fidelity/Crime Insurance Requirements for Project Developments (12/14/2022)
Determining if Fidelity/Crime Insurance is Required
Coverage Requirements
Determining the Required Coverage Amount
Named Insured
Determining if Fidelity/Crime Insurance is Required
Fidelity/crime insurance is required for all condo and co-op projects, with the following exceptions:
projects that qualify for a waiver of project review as described in B4-2.1-02, Waiver of Project Review,
condo projects reviewed under the Limited Review method as described in B4-2.2-01, Limited Review Process,
condo or co-op projects consisting of 20 units or less, or
condo or co-op projects that would need fidelity/crime insurance coverage of $5,000 or less (based on the calculations described in Determining the Required Coverage Amount).
Coverage Requirements
When required, the HOA or co-op corporation must have fidelity/crime insurance coverage for the dishonest or fraudulent acts of anyone who either handles or is responsible for funds held or administered for the HOA or co-op corporation. Fidelity/crime insurance is required whether or not that individual receives compensation for services rendered. Accordingly, the HOA or co-op corporation fidelity/crime insurance policy must include coverage for the acts of any management agent.
A management agent that handles funds for the HOA or co-op corporation should additionally be covered by its own fidelity/crime insurance policy, however, a fidelity/crime insurance policy maintained by the management agent (with the management agent as the named insured) is not an acceptable alternative for a fidelity/crime insurance policy in the HOA or co-op corporation's name that provides coverage for the acts of all parties with access to their funds, including the management agent.
Determining the Required Coverage Amount
When fidelity/crime insurance is required, the lender or servicer must review the project legal documents or other source acceptable to the lender or servicer to verify whether the HOA or co-op corporation and any associated management company adhere to one or more of the financial controls listed below:
Separate bank accounts are maintained for the working account and the reserve account, each with appropriate access controls, and the bank in which funds are deposited sends copies of the monthly bank statements directly to the HOA or co-op corporation.
The management company maintains separate records and bank accounts for each HOA or co-op corporation that uses its services, and the management company does not have the authority to draw checks on, or transfer funds from, the reserve account of the HOA or co-op corporation.
Two members of the Board of Directors must sign any checks written on the reserve account.
The following table describes how to determine the minimum required amount of fidelity/crime insurance.
If the HOA or co-op corporation
Then the fidelity/crime insurance coverage amount must equal at least...
adheres to one or more of the financial controls above
the sum of three months of assessments on all units in the project.
does not adhere to one or more of the financial controls above
the maximum funds that are in the custody of the HOA or co-op corporation, or its management agent, at any time.
Note: In states that have statutory fidelity/crime insurance requirements, Fannie Mae accepts those requirements in place of its own.
Named Insured
The fidelity/crime insurance policy must designate the HOA or co-op corporation as the named insured with premiums paid as a common expense by the HOA or co-op corporation.
