United States

Flood insurance escrow, detached structures, and force-placed insurance


On June 22, 2015, the regulatory agencies announced their approval of a joint final rule amending the regulations pertaining to loans secured by collateral that is located in a flood zone. The substantive changes relate to mandatory escrow requirements, a detached structure exemption, and force placement requirements.

The first substantive change is that on or after Jan. 1, 2016, financial institutions must escrow for flood insurance premiums if the loan is secured by residential real estate or a mobile home. This escrow requirement is triggered when any loan is made, increased, renewed, or extended on or after Jan. 1, 2016.  The final rule provides for several exceptions to the mandatory escrow provision. The exceptions are as follows:

  • Loans that are primarily for business, commercial, or agricultural purpose
  • Loans   in a subordinate position to a senior lien that is secured by the same residential improved real estate or mobile home provided that the borrower has obtained flood insurance in an adequate amount
  • Loans with adequate insurance coverage that is provided by a condominium association, cooperative, homeowners association or other applicable group. Additionally, the premium must be paid by the condominium association, cooperative or homeownership group as a common expense
  • Home Equity Lines of Credit
  • Non-performing loans that are at least 90 days past due and meet other specific requirements
  • Loans that have a term of 12 months or less
  • Financial institutions that are considered small lenders. A financial institution is considered a small lender if it meets all of the following requirements:
    • The institution had assets under $1 billion as of Dec. 31 for either of the two prior calendar years
    • On or before July 6, 2012, the institution was not required, under federal or state law, to escrow for taxes, insurance premiums, fees, or any other charges for the whole term of any loan secured by residential improved real estate or a mobile home; and did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.

The second substantive change is a new exemption to the requirement to obtain flood insurance for detached structures that is part of residential property. This applies if the structure is detached from the primary residence and does not serve as a residence. However, the Bank may choose to require the borrower to obtain flood insurance on the detached structure. The statutory exemption took effect when Homeowner Flood Insurance Affordability Act (HIFFA) was effective on March 21, 2014.
The third substantive change clarified that financial institutions are able to charge a borrower for the cost of force-placed flood insurance beginning on the date the coverage lapsed or became insufficient. The final rule also specifies when force-placed insurance must be terminated and refunds of premiums paid to borrowers, as well as what documentation the lender may require from the borrower before termination of the force-placed insurance. These provisions were effective when the Biggert-Waters Act was effective on July 6, 2012.