Interagency Flood Insurance Regulation Update Webinar: Questions and Answers
On October 22, 2015, the Federal Reserve System hosted an interagency Outlook Live webinar titled “Interagency Flood Insurance Regulation Update.”1 Speakers from the Board of Governors of the Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, the agencies) discussed the amendments to their flood insurance regulations, which were published in July 2015 (80 Fed. Reg. 43216, July 21, 2015). Participants submitted a significant number of questions before and during the session. Because of time constraints, only a portion of those questions were answered during the webcast. This article addresses some of the most common questions received. Staff from each of the presenting agencies assisted in providing responses to these participant questions.
Escrow
- Does the requirement to escrow flood insurance premiums and fees apply when a loan does not experience a triggering event, such as when the loan is modified without being increased, extended, or renewed; the loan is assumed by another borrower; or the building securing the loan is remapped into a Special Flood Hazard Area (SFHA)?
No, the requirement is subject to certain exceptions. The agencies’ regulations provide that a lender or its servicer is required to escrow flood insurance premiums and fees when a designated loan is made, increased, extended, or renewed (a triggering event), unless either the lender or the loan is excepted from the escrow requirement. Until the loan experiences a triggering event the lender is not required to escrow flood insurance premiums and fees unless (i) a borrower requests the escrow in connection with the agencies’ regulatory requirement that the lender provide an option to escrow for outstanding loans or (ii) the lender determines that a loan exception to the escrow requirement no longer applies. A designated loan is a loan secured by a building or mobile home that is located or is to be located in an SFHA, in which flood insurance is available under the National Flood Insurance Act (the act). - If the borrower has already been granted an exception from the lender to escrow for taxes, homeowner’s insurance, and flood insurance, does the lender or its servicer still need to send a notice to offer the ability to escrow for the flood insurance?
Yes. The agencies’ regulations do not exclude loans for which borrowers have previously waived escrow from the requirement to offer and make the option available to escrow flood insurance premiums and fees. Consequently, lenders or their servicers still must send a notice of the option to escrow flood insurance premiums and fees to borrowers who have previously waived escrow or for whom lenders previously offered an option to escrow. Although a borrower may have previously decided to waive escrow or had already been offered an option to escrow, it is possible that the borrower’s circumstances have changed, and if offered another chance to escrow, the borrower may desire to do so. - Is the option to escrow notice required for all outstanding loans that are not exempt and secured by residential real estate or just those that are in a flood zone?
Under the agencies’ regulations, lenders or their servicers are required to offer and make the option available to escrow flood insurance premiums and fees for all outstanding designated loans secured by residential improved real estate or mobile homes as of January 1, 2016, or July 1 of the first calendar year in which the lender no longer qualifies for the small lender exception to the escrow requirement. The requirement to provide the option to escrow notice does not apply to loans or lenders that are excepted by the agencies’ regulations from the general escrow requirement. The option to escrow notice requirement also does not apply to loans that are not subject to the mandatory purchase requirement. - If a lender does not qualify for the small lender exception and purchases a portfolio of loans secured by residential improved real estate or mobile homes from a small lender eligible for the exception, must the purchasing lender require an escrow account on the designated loans in the portfolio or provide notice of the option to escrow to the borrowers?
It depends. Under the agencies’ regulations, the requirement to notify borrowers of the option to escrow applies to a lender’s loans outstanding as of January 1, 2016. Therefore, if a lender purchased a portfolio of loans secured by residential improved real property or mobile homes prior to January 1, 2016, and the loans remained outstanding in the lender’s portfolio as of that date, the lender would be required to provide the notice of the option to escrow to borrowers on designated loans. On the other hand, if the portfolio purchase occurred after January 1, 2016, a lender that does not qualify for the small lender exception would not be required by the agencies’ regulations to send the notice of the option to escrow. Nor would an escrow have to be established on the designated loans in the portfolio because the purchase of a portfolio of loans is not a triggering event. However, if a triggering event occurs in connection with any designated loan in the portfolio after the purchase, the lender or its servicer would need to require an escrow for flood insurance premiums and fees. - Is it true that lenders qualifying for the small lender exception are not required to provide borrowers the escrow notice or the option to escrow notice?
Yes. Lenders that qualify for the small lender exception are not required to provide borrowers either the escrow notice or the option to escrow notice unless the lender ceases to qualify for the small lender exception. - If a lender does not escrow for taxes or homeowner’s insurance, is it still required to escrow for flood insurance under the new rule? If yes, is the lender obligated to escrow for taxes and other insurance because it escrows for flood insurance pursuant to the rule?
If a lender or its servicer is required to escrow for flood insurance under the new rule, it must do so even if it does not escrow for taxes or other insurance. A lender or servicer is not, however, obligated to escrow for taxes and other insurance because it escrows for flood insurance pursuant to the agencies’ flood rule, although other regulations may apply that require the escrow. Furthermore, a lender may always choose to require an escrow even when it is not mandated. - For which types of loans must a lender or its servicer provide the option to escrow notice? If a loan is subject to an exception (e.g., a business purpose loan), does a lender that does not qualify for the small lender exception still have to provide an option to escrow notice in connection with that loan?
Lenders or their servicers that do not qualify for the small lender exception must provide the option to escrow notice to borrowers for designated loans secured by residential improved real estate or mobile homes outstanding as of January 1, 2016. However, if a loan is subject to another exception (e.g., business, commercial, or agricultural purpose), the lender or its servicer is not required to provide an option to escrow in connection with that loan. - If a creditor originates a second mortgage loan for a property located in an SFHA and it is determined that the first lienholder does not have sufficient flood insurance coverage for both liens and is not currently escrowing for flood insurance, does the second lienholder have to escrow for the additional amount of flood insurance coverage?
Under the agencies’ regulations, junior lienholders are not required to escrow for flood insurance if the borrower has obtained flood insurance for a closed-end second mortgage loan that meets the mandatory purchase requirement. Thus, the lender or its servicer must ensure that adequate flood insurance is in place. Question No. 36 of the July 2009 Interagency Questions and Answers Regarding Flood Insurance explains the requirements for junior lienholders. If adequate flood insurance is not obtained, the lender or servicer would need to escrow. However, the escrow requirements do not apply to a junior lien that is a home equity line of credit (HELOC). - Does a lender or its servicer have to escrow for loans when the property is not located in an SFHA but the borrower chooses to buy flood insurance?
Under the agencies’ regulations, a lender and its servicers are only required to escrow for loans that are secured by residential improved real estate or mobile homes located or to be located in SFHAs where flood insurance is available under the National Flood Insurance Program and that experience a triggering event (i.e., made, increased, extended, or renewed) on or after January 1, 2016, unless either the lender or the loan qualifies for an exception. If the property securing the loan is not located in an SFHA, the lender or its servicer is not required to escrow, although the lender or its servicer may choose to do so. - Is there an exception to the escrow requirement for loans secured by multifamily buildings? Is there an exception for commercial loans?
The agencies’ regulations specify that the escrow requirements do not apply to a loan that is an extension of credit primarily for business, commercial, or agricultural purposes, even if secured by residential real estate. In addition, the escrow requirements would not apply to a loan secured by a particular unit in a multifamily residential building if a condominium association, cooperative, homeowners association, or other applicable group provides an adequate policy and pays for the insurance as a common expense. Otherwise, the escrow requirements would generally apply to loans for units in multifamily residential buildings.
Force-Placed Insurance
- Following a flood map change, is a regulated lending institution required to force place flood insurance during the 45 days following the notice to the borrower, or can the institution wait 45 days after notifying the borrower?
The agencies’ regulations permit a lender or its servicer to force place flood insurance beginning on the date the borrower’s policy lapsed or did not provide sufficient coverage to ensure continuous flood coverage for both the institution and the borrower, and any time after that date. However, if a borrower fails to obtain flood insurance within 45 days of the lender’s notification to the borrower of the need to obtain flood insurance, the lender must force place flood insurance at that time. - If the need for flood insurance on a property was mistakenly not required because of a vendor error and is later discovered, is the process to cure the same as if the property newly became covered under the act? If not, what procedural steps must be taken?
The same procedures must be followed when a lender or its servicer discovers that improved collateral real property is not covered by flood insurance because of vendor error that is used when flood insurance coverage for such property becomes necessary as the result of a mapping change. Under the agencies’ regulations, if a lender, or a servicer acting on its behalf, determines at any time during the term of a designated loan that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or that the coverage is inadequate, the lender or its servicer must notify the borrower of the need to obtain adequate flood insurance at the borrower’s expense. If the borrower fails to obtain adequate flood insurance within 45 days after notification, the lender must purchase flood insurance on behalf of the borrower. - If a lender cannot get a full refund from the insurance company because the borrower did not provide proof of coverage in a timely manner, is the lender required to refund the full premium to the customer?
The agencies’ regulations specifically require the refund of force-placed insurance premiums for any overlap period and do not provide any exceptions to that requirement. Moreover, the agencies clarified in the supplementary information accompanying the July 2015 Final Rule that a lender’s refund obligation is not subject to the insurer’s refund of the premium. - If a lender or its servicer is required to force place flood insurance because the property was remapped into an SFHA, may the lender or its servicer charge the borrower as of the date the lender receives notice of the remapping?
The agencies’ regulations provide that a lender or its servicer may charge the borrower for the cost of premiums and fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide sufficient coverage. When a lender or its servicer receives notice of a property being remapped into an SFHA, the effective date of the remapping change is the date the property has insufficient coverage. Therefore, along with sending the appropriate notice to the borrower to purchase adequate flood insurance, the lender or its servicer can force place flood insurance beginning on the effective date provided in the date of notice of remapping and, also as of that day, charge the borrower for the force-placed insurance provided force-placed insurance is in place. However, if the borrower purchases an adequate flood insurance policy, the lender or its servicer would need to reimburse the borrower for premiums and fees charged for the force-placed coverage during any period of overlapping coverage.
Detached Structures
- Has the Consumer Financial Protection Bureau (CFPB) revised the Special Information Booklet required by Section 13 of the Homeowner Flood Insurance Affordability Act (HFIAA) to require that language related to detached structures be included in the required Special Information Booklet?
Yes. The CFPB has revised the Special Information Booklet as required by Section 13 of the HFIAA, which also amends Section 5(b) of RESPA (12 U.S.C. 2604(b)), to require language related to detached structures. The booklet, titled “Your Home Loan Toolkit: A Step-by-Step Guide,” states: “Although you may not be required to maintain flood insurance on all structures, you may still wish to do so, and your mortgage lender may still require you to do so to protect the collateral securing the mortgage. If you choose to not maintain flood insurance on a structure, and it floods, you are responsible for all flood losses relating to that structure.” - If a borrower currently has a flood insurance policy on a detached structure that does not serve as a residence, can the lender or its servicer cancel its requirement to carry that flood insurance?
If a borrower has a flood insurance policy on a detached structure, which is part of residential property that does not serve as a residence, the borrower is no longer required by statute to have flood insurance on that building. The lender may allow the borrower to cancel the policy. As the agencies noted in the supplementary information accompanying the July 2015 Final Rule, for detached structures that are of relatively high value, if warranted as a matter of safety and soundness, the lender may continue to require flood insurance coverage on the detached structure in that such coverage may be in the borrower’s best interest. - If a property is remapped into a flood zone, does that trigger a review of the intended use of each detached structure?
A lender must examine the status of a detached structure upon a qualifying triggering event (i.e., making, increasing, extending, or renewing a loan). However, consistent with existing obligations under the agencies’ regulations, if a lender determines at any time that a property has become subject to the mandatory flood insurance purchase requirement and, as a result, the collateral is uninsured or underinsured, the lender has a duty to inform the borrower of the obligation to obtain or increase insurance coverage. The agencies agree that lenders do not have a duty to monitor the status of a detached structure following the lender’s initial determination because of the minimal postclosing communications with borrowers or lack of systematic inspections of the property. However, as discussed in Question No. 7 of the agencies’ July 2009 Interagency Questions and Answers Regarding Flood Insurance, regardless of the lack of such requirement in the agencies’ regulations, sound risk management practices may lead a lender to conduct scheduled periodic reviews that track the need for flood insurance on a loan portfolio. - Can a lender review current loans in its portfolio as flood insurance policies renew and determine that it would no longer require flood insurance on a detached structure in a flood zone if the structure does not provide contributory value?
A lender or its servicer could initiate such a review; however, the agencies’ regulations do not permit the exemption of structures from the mandatory flood insurance purchase requirement based solely on their contributory value. Flood insurance is not required, in the case of any residential property, on any structure that is a part of such property but is detached from the primary residential structure and does not serve as a residence. In addition, other exemptions could apply, such as the exemption for state-owned property covered under a policy of self-insurance satisfactory to the administrator of the Federal Emergency Management Agency, the exemption for property securing any loan with an original principal balance of $5,000 or less, or the exemption for a loan with a repayment term of one year or less.
Specific issues and questions should be raised with your primary regulator.
- 1 An archived version of the webinar is available online.