Federal Agencies Issue Several Changes to Flood Insurance
Author: Chris Boersma
On June 22, 2015, five federal regulatory agencies released a joint final rule implementing new requirements that affect loans secured by properties located in special flood hazard areas.
Mandatory Escrow Account
The Homeowner Flood Insurance Affordability Act (HFIAA) requires a mandatory escrow account be established for loans secured by residential improved real estate or a mobile home made, increased, renewed or extended, i.e., a MIRE event, on or after January 1, 2016. Financial institutions must comply with this requirement unless the institution qualifies for the “small lender exception” status. To qualify for this exception, the institution must meet both of the following requirements:
- Its total assets were less than $1 billion as of December 31 of 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 and insurance on any loan secured by residential improved real estate or a mobile home and the institution did not have a policy of consistently and uniformly requiring escrow for taxes and insurance on any loan secured by residential improved real estate or a mobile home
If the financial institution’s exception status should change, the regulation has specific requirements for timely compliance.
The requirement for an escrow account does not apply if any of the following are true:
- The loan purpose is primarily business, commercial or agricultural
- The loan is in a subordinate position to a senior lien secured by the same residential improved real estate for which flood insurance was obtained
- The loan is secured by residential improved real estate or mobile home that is part of a condominium association, cooperative or homeowners association with adequate insurance paid by the association or cooperative
- The loan is a home equity line of credit
- The loan is a nonperforming loan under the regulatory definition
- The loan has a term not longer than 12 months
Effective January 1, 2016, HFIAA requires financial institutions not exempt from establishing mandatory escrow accounts to mail or deliver a written notice informing the borrower of the financial institution’s requirement to escrow all premiums and fees for required flood insurance. Any financial institution utilizing the regulation’s Appendix A, Sample Form of Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance, will be considered to comply with this requirement. The revised Appendix A notice also will include new statements regarding flood insurance that provides the same level of coverage as a standard flood insurance policy under the National Flood Insurance Program (NFIP). The statements also will state that coverage may be available from a private insurance company, that the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies, and that any borrower questions should be directed to an insurance agent.
Notification Requirements for Option to Escrow Flood Insurance
No later than June 30, 2016, any financial institution without small-lender exception status must mail or deliver a written notice to all borrowers of loans secured by residential improved real estate or a mobile home outstanding on January 1, 2016, that do not already have an escrow account. The notice will inform the borrower of the option to escrow premiums and fees for any required flood insurance. The notice does not apply if any of the circumstances that exempt an institution from the escrow account requirement (as listed above) are true.
Any financial institution utilizing the regulation’s Appendix B, Sample Clause for Option to Escrow for Outstanding Loans, will be considered in compliance with this requirement.
Forced-Placed Flood Insurance Rules
The Biggert-Waters Flood Insurance Reform Act of 2012 included provisions regarding forced-placed insurance, clarifying that financial institutions have authority to charge a borrower for the cost of forced-placed flood insurance starting on the date a borrower’s coverage lapses or becomes insufficient. The change allows financial institutions to charge the borrower for the cost of premiums and fees incurred for the coverage beginning on the date coverage lapsed or became insufficient. Within 30 days of receipt of confirmation of a borrower’s existing flood insurance coverage, the financial institution or servicer shall contact the insurance provider to terminate any forced-placed insurance and refund all forced-placed insurance premiums and fees charged to the borrower during any period of coverage overlap. The preamble to the June 22, 2015, joint final rule indicated the forced-placed insurance requirements were effective as of the effective date of the final rule, i.e., July 6, 2012.
Clarification to Detached Structure Rule
The final rule provided clarifications to an exemption to the mandatory flood insurance purchase requirement for a detached structure that is part of residential property and does not serve as a residence. “A structure that is part of a residential property” is a structure used primarily for personal, family or household purposes and not used primarily for agricultural, commercial, industrial or other business purposes. As defined by the IRS, a residence generally contains sleeping, bathroom or kitchen facilities. Financial institutions have the option to impose flood insurance on detached structures, even if it is not required by federal law. The preamble to the June 22, 2015, joint final rule indicated the exclusion for certain detached structures from the mandatory flood insurance purchase requirement took effect when HFIAA was enacted, i.e., March 21, 2014.
For more information on how these rules could affect your institution, contact your BKD advisor.