Author:Elva Coffey-Sears The amendments to the flood insurance rules published in June include significant changes to the escrow requirement for flood insurance premiums and fees. Currently, lenders are required to escrow flood insurance premiums and fees only if the lender is requiring an escrow of taxes, insurance, fees or other charges for a loan secured by residential improved real estate or a mobile home. Effective January 1, 2016, lenders will be required to establish an escrow account for all flood insurance premiums and fees for any designated loan secured by residential improved real estate or a mobile home that is made, increased, extended or renewed, unless the loan or lender qualifies for a statutory exception or the lender is exempt.
The regulation defines a designated loan as a loan secured by a building or mobile home that is or will be located in a special flood hazard area in which flood insurance is available under the Act, but provides exceptions from the escrow requirements for:
- Loans primarily for business, commercial or agriculture purpose
- Subordinate-lien loans on a covered property for which the required flood insurance is already in place as a condition of the senior lien
- Properties for which the required flood insurance is provided by a condominium association, cooperative, homeowners association or other such group and is paid by that entity as a common expense
- Home equity lines of credit
- Nonperforming loans that are 90 or more days past due and remain nonperforming until modified, collected, or discharged
- A loan with a term of 12 months or less
Additionally, the regulation provides a small lender exception for banks with total assets of less than $1 billion as of December 31 of either of the two prior calendar years, provided that, on or before July 6, 2012, the lender was not required by law to maintain escrow accounts and did not have a policy of consistently and uniformly requiring escrow accounts for loans secured by residential improved real property or a mobile home. An excepted lender that subsequently exceeds the asset limitation must comply with the escrow rules by July 1 of the year following the status change.
Finally, the rule implements a requirement that lenders must offer and make available the option to escrow flood insurance premiums and fees for any designated loan secured by residential improved real estate or a mobile home that is outstanding on January 1, 2016 or July 1 of the year following the lender’s status change to borrowers. This holds true unless the loan or lender qualifies for a statutory exception or the borrower is already escrowing all premiums and fees for flood insurance.