The federal government is offering residential property lenders guidance on escrowing their borrowers’ flood insurance premiums and on when property owners do not have to buy flood coverage for detached structures.
Five federal regulatory agencies are seeking comment on a proposed rule pertaining to loans secured by property located in special flood hazard areas. The rule, part of a broader proposal first offered last October, implements provisions of the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) relating to escrowing flood insurance payments and the exemption of certain detached structures from the mandatory flood insurance purchase requirement.
HFIAA amends the escrow provisions of the Biggert-Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act).
In accordance with HFIAA, the proposed rule would require regulated lending institutions to escrow premiums and fees for flood insurance 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 regulated lending institution or a loan qualifies for a statutory exception.
In addition, the rule requires institutions to provide borrowers of residential loans outstanding on January 1, 2016, the option to escrow flood insurance premiums and fees.
The proposal includes new and revised sample notice forms and clauses concerning the escrow requirement and the option to escrow.
Finally, the proposal would eliminate the requirement to purchase flood insurance for a structure that is a part of a residential property located in a special flood hazard area if that structure is detached from the primary residential structure and does not also serve as a residence. However, under HFIAA, lenders may nevertheless require flood insurance on the detached structures to protect the collateral securing the mortgage.
The loan regulation proposal is being offered by the Office of the Comptroller of the Currency, the Federal Reserve System, Federal Deposit Insurance Corp., the Farm Credit Administration and the National Credit Union Administration.
The agencies said they will address other provisions of the Biggert-Waters Act for which the agencies have jurisdiction and that were not amended by HFIAA in a separate rulemaking. These include rules requiring lending institutions to accept private flood insurance coverage in order to satisfy the mandatory flood insurance purchase requirement and provisions to implement changes related to force-placed flood insurance.
Comments on the escrow regulation must be submitted within 60 days after the rule is published in the Federal Register. The proposed regulation is embedded below.