United States

Agencies issue flood insurance proposal


The Board of Governors of the Federal Reserve, Farm Credit Administration, Federal Deposit Insurance Corporation, National Credit Union Administration and the Office of the Comptroller of the Currency (collectively, Agencies) have issued a joint notice of proposed rulemaking to implement provisions of the Homeowner Flood Insurance Affordability Act (HFIAA) regarding the escrowing of flood insurance payments and insuring certain detached structures. 

Under the proposed rule, institutions would be required to escrow premiums and fees for flood insurance on loans secured by residential improved real estate or mobile homes for any loan that is made, increased, renewed or extended (remember MIRE) after Jan. 1, 2016. Institutions would also have to make the option to escrow flood insurance premiums and fees available to borrowers with loans outstanding as of Jan. 1, 2016, and to borrowers of an exempt institution after that institution is no longer exempt. The proposed exemption from the escrow requirements for institutions and for loans is as follows: 

  1. Institutions with total assets of less than $1 billion as of Dec. 31 of either of the two prior years; and that as of July 6, 2012 (which is the date of enactment of Biggert-Waters):
    1. Were not required by Federal or State law to escrow taxes or insurance
    2. Did not have a policy to require the escrow of taxes and insurance
  2. The loan is:
    1. An extension of credit primarily for business, commercial, or agricultural purposes
    2. In a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which sufficient flood insurance is being provided
    3. Secured by residential improved real estate or a mobile home that is part of a condo, cooperative, or other project development that is covered by a flood insurance policy that meets certain conditions
    4. A home equity line of credit (HELOC)
    5. A nonperforming loan that is 90 or more days past due
    6. One that has a term not longer than 12 months

The proposal also includes a new exemption to the general mandatory flood insurance requirement for detached structures. Detached structures are defined as any structure that is part of any residential property, but is detached from the primary residential structure of that property, and that does not serve as a residence. This provision was effective on enactment of HFIAAA, but the proposed rule would make it a part of the Agencies’ rules. To clear up potential confusion in this area, the preamble to the proposal allows lenders to use their discretion in requiring flood insurance on these types of detached structures as a matter of safety and soundness to protect the collateral securing the loan. (In the future, a disclosure advising borrowers that they may still wish to obtain, and that mortgage lenders may still require borrowers to maintain, flood insurance even when it is not required by the Flood Disaster Protection Act may be required under Real Estate Settlement Procedures Act after the Consumer Financial Protection Bureau implements section 13(b) of HFIAA).

Further, the proposal includes:

  • Requirements for revised and new notices as a result of both the escrow and detached structure requirements
  • Transition rules for changes in the status of small lenders
  • Timing requirements for the implementation of escrowing for existing borrowers who elect to have flood insurance premiums and fees escrowed (either because the loan existed on Jan. 1, 2016, or because the lender no longer qualifies for the small lender exemption)

Noticeably missing from the proposal are requirements relating to the acceptance of private flood insurance and for the force placement of flood insurance.  According to the Agencies, these two topics will be covered in a separate rulemaking. The proposal will not supersede current Biggert-Waters escrow provisions that were effective July 5, 2012, which will continue to be enforced until Dec. 31, 2015. 

The comment period on the proposal closed on Dec. 29, 2014.