Magazine article Mortgage Banking

To Escrow, or Not to Escrow: New Flood Insurance Rules

Magazine article Mortgage Banking

To Escrow, or Not to Escrow: New Flood Insurance Rules

Article excerpt

ACCORDING TO THE FEDERAL EMERGENCY MANAGEMENT AGENCY (FEMA), "Floods are the most common and costly natural disaster in the United States."

In 2011, homeowners throughout the country painfully learned that lesson as they endured overwhelming flooding that resulted in billions of dollars' worth of damage to their properties. That year, Hurricane Irene alone is estimated to have caused between $7 billion and $10 billion in losses, mostly from flooding.

These significant losses translate to a significant volume of flood insurance claims. For example, in 2005 Hurricane Katrina resulted in claim payments of $16.2 billion from the National Flood Insurance Program (NFIP), making it the most expensive flood since the NFIP began in 1968.

These dramatic statistics serve as a harsh reminder to lenders about the importance of understanding and properly complying with federal flood insurance laws and regulations.

On July 21, 2015, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), the Farm Credit Administration (FCA) and the National Credit Union Administration (NCUA) jointly published a final rule to implement new flood insurance requirements enacted in the Biggert-Waters Flood Insurance Reform Act (BWA) of 2012 and the Homeowner Flood Insurance Affordability Act (HFIAA) of 2014.

And like most legislation, it is not completely clear what the effect on lenders and servicers will be--but it will certainly require them to reconsider how they manage flood issues moving forward.

To ensure they are compliant with the new rules, banks are required to:

* identify for borrowers the initial payment and all monthly payments to the escrow account;

* provide borrowers with an escrow account statement;

* review the escrow account annually to determine if any changes must be made (if the insurance costs or taxes increase or decrease);

* provide the borrower with an annual escrow account statement; and

* correct any errors that are made in escrow calculations, adjust for these errors and notify the borrower of changes that have been made.

The new regulations added an additional layer of requirements for servicers, and some new deadlines are coming up this year regarding escrow accounts. These requirements include:

* Servicers are required to offer and make available the option to escrow to borrowers (this excludes exempted servicers--those with assets of less than $1 billion--and loans already escrowing for flood insurance;

* Escrow notices must be delivered to borrowers by June 30, 2016;

* If exempted status changes, notice must be delivered by Sept. 30 on the first calendar year of the status change;

* Notices can be combined with other disclosures or sent separately; and

* If a borrower requests escrow, this must begin as soon as reasonably practicable.

The final rule exempts from the flood insurance escrow requirement the following:

* financial institutions with total assets of less than $1 billion (as of Dec. 31 of either of the two prior calendar years);

* any institution that, as of July 6, 2012, was not required under federal or state law to deposit taxes, insurance premiums, fees or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home;

* loans with 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 when covered by a flood insurance policy that 1) meets the mandatory flood insurance purchase requirement, 2) is provided by the condominium association, cooperative, homeowners association or other applicable group, and 3) the premium for which is paid by the condominium association, cooperative, homeowners association or other applicable group as a common expense;

* loans secured by residential improved real estate or a mobile home that is used as collateral for a business, commercial or agricultural purpose;

* home-equity lines of credit;

* nonperforming loans, which the regulation defines as a loan that is 90 or more days past due and remains nonperforming until it is permanently modified or until the entire amount past due--including principal, accrued interest and penalty interest incurred as the result of past due status--is collected or otherwise discharged in full; and

* loans with terms of 12 months or less. …

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