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Fidelity coverage provides protection for associations in the event of embezzlement/theft of the association's financial assets by officers, directors, employees, and all others involved in the administration of the association's funds.
Why is it so important?
Fidelity coverage is required by federal lending guidelines for Associations with over 20 units. The minimum amount to be carried is the equivalent of three months' worth of Association dues for Fannie Mae (FNMA) lending eligibility, while FHA lending requires three months' worth of dues plus full reserve account balances.
Why should HOAs care about federal lending compliance?
As of 2008, approximately 20% of all condominium mortgages were FHA-insured. FHA insurance is typically required for home purchases where the down payment is less than 20% of the purchase price of the home.
Given that lenders are again 'tightening the belts' on regulatory issues following the crash of the housing market from a few years back, federal lending guideline compliance is of great importance. This is because it provides potential buyers with more financing options for their homes, and as a result makes homes within each qualifying Association more marketable to a larger number of potential buyers.
What are some examples of Fidelity claims?
The XYZ Homeowners Association has Fidelity Bond coverage in the amount of $1,250,000. It is summertime, and Board Member Bob and Board Member Mary decide that they would like to visit Italy. They collaborate to have reserve funds withdrawn into their custody, where they then deposit the money into their new offshore accounts. They drain $1,000,000 from the Association's bank accounts and are never heard from or seen again.
In this situation, the Association's Fidelity coverage will make the Association whole on it's loss while Interpol searches for Board Member Bob and Board Member Mary.