The often challenging area of flood insurance requirements, including lender-placed insurance, has become a bit clearer for lenders and loan servicers. Five of the federal banking regulatory agencies (Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, Farm Credit Administration, and National Credit Union Administration) recently issued a joint final rule regarding flood insurance which serves to clarify the October 2013 Proposed Rule related to loans secured by properties in special flood hazard areas and implements the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).
In addition to implementing provisions in the Biggert-Waters Flood Insurance Act of 2012, the final rule does the following:
- requires escrowing of flood insurance payments for non-exempt loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after January 1, 2016;
- requires that borrowers be given the option to escrow flood insurance premiums and fees, as to residential loans extant as of January 1, 2016;
- clarifies that regulated lending institutions and servicers acting on their behalf are allowed to charge for lender-placed flood insurance; and
- states that the mandatory escrow of flood insurance premiums provisions, and the escrow option provisions, in this final rule will become effective on January 1, 2016, with the other provisions becoming effective on October 1, 2015.
The final rule will require regulated lending institutions (defined as any “bank, savings and loan association, credit union, farm credit bank, Federal land bank association, production credit association, or similar institution subject to the supervision of a Federal entity for lending regulation”) and loan servicers acting on their behalf to escrow flood insurance premium payments for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after January 1, 2016, unless the loan qualifies for a statutory exception or one of the below-described exemptions. It also requires regulated lending institutions and servicers acting on their behalf to provide residential borrowers with loans extant as of January 1, 2016, the option to escrow flood insurance premiums and fees.
Exemptions from the Escrow Requirement
There are several exemptions to the rule’s escrow requirements, however. One exemption is for a structure that is a part of a residential property but detached from the primary residential structure and which does not serve as a residence. Lenders can require flood insurance on the detached structures for the benefit of the borrower. An additional exemption for regulated lending institutions with total assets under $1 billion (as of July 6, 2012) who were not required by Federal or State law to escrow taxes or insurance for the term of the loan, and who did not have a policy of uniformly and consistently escrowing taxes and insurance.
Further exemptions from the escrow requirement are for:
- loans that are in a subordinate position to a senior lien secured by the same property for which flood insurance is being provided;
- loans secured by residential improved real estate or a mobile home that is part of a condominium, cooperative, or other project development, provided certain conditions are met;
- loans that are extensions of credit primarily for a business, commercial, or agricultural purpose;
- home equity lines of credit;
- nonperforming loans; and
- loans with terms not longer than 12 months.
When a regulated lending institution (or a loan servicer acting on its behalf) determines, however, that an exception no longer applies, the institution must require the escrow of flood insurance premiums and fees.
Lender-placed insurance is a scrutinized area and the rule clarifies that regulated lending institutions and loan servicers acting on their behalf do have the authority to charge a borrower for the cost of lender-placed flood insurance coverage beginning on the date on which the borrower’s coverage lapses or becomes insufficient. The rule specifies the circumstances under which regulated lending institutions and servicers acting on their behalf must end lender-placed flood insurance coverage – namely when they receive proof of existing flood insurance coverage – and refund payments back to a borrower. The rule also defines the documentary evidence that regulated lending institutions and servicers acting on their behalf must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage.
The rule describes new and revised sample notice forms and clause language concerning both the escrow requirement as well as the option to escrow. It does not, however, address the private flood insurance provisions in the Biggert-Waters Act as the agencies plan to address these provisions in a separate rulemaking.
As flood insurance continues to be an area of scrutiny in the financial services industry, these final rules offer significant clarification from regulating entities and escrow issues, and lender-placed insurance.