Don’t get swamped by new flood rules

You may have heard that the federal financial regulatory agencies have jointly amended their flood insurance regulations in order to incorporate changes effected by the Homeowner Flood Insurance Affordability Act of 2014. This means that financial institutions will be required to escrow for flood insurance premiums and other fees for residential improved properties, but new exemptions are created for certain detached structures from the mandatory flood insurance requirement. There are also clarifications dealing with the force placement of flood insurance premiums.

These changes will generally be effective on January 1, 2016, and clarifications to the existing rule are effective October 1, 2015. Don’t get swept away with the new alterations; here’s what you should know.

Operational Changes

Financial institutions with assets of $1 billion or more will have to begin escrowing for flood insurance premiums and other fees for any designated loan secured by residential improved property or a mobile home that is originated, refinanced, increased, extended, or renewed on or after January 1, 2016 However, there is a small lender exemption for financial institutions with assets of less than $1 billion. These institutions are not required to escrow for flood insurance premiums and fees, unless they have a policy of uniformly and consistently escrowing for taxes and insurance or if they were otherwise required by Federal or State law to escrow for taxes and insurance as of July 6, 2012 (the enactment date of the Biggert-Waters Act) for the term of the loan.

Exceptions

There are a number of additional exceptions to this new requirement. Flood insurance premiums and fees will not require to be escrowed for:

• Loans that are in a subordinate position to a senior lien secured by the same property for which flood insurance is being provided;
• Loans secured by residential improved real estate or a mobile home that is part of a condominium, cooperative, or other project development, provide certain conditions are met;
• Loans that are secured by residential improved real estate or a mobile home that is used as collateral for a business purpose;
• Home equity lines of credit;
• Nonperforming loans; and
• Loans with terms of 12 months or less.

New Language

Financial institutions or the servicers acting on their behalf will have to provide a revised Notice of Special Flood Hazards including new language that advises the borrower about the requirement to escrow for the flood insurance premiums and fees. The new language also explains that the escrow requirement could be triggered at any time during the life of the loan if the lender or servicer subsequently determines that a previous exception to the escrow requirement no longer applies. Model language to be incorporated into the notice is provided in Appendix A of the rule.

In addition, covered financial institutions must give borrowers with existing designated loans as of January 1, 2016 the option to escrow for their flood insurance premiums and fees unless the lender or the loan is otherwise exempt from the escrow requirement. This notice must be provided by June 30, 2016 and financial institutions must comply with the borrower’s request to escrow within a reasonable period of time. A model clause for the notice is provided in Appendix B. There are specific rules that apply in situations where an institution that previously qualified for the small lender exemption no longer qualifies.

Financial institutions will no longer have to require flood insurance for detached structures on residential properties if the property is not connected to the primary residence and it is not being used as a residence. The determination of whether the property is being used as a residence is left to the good faith determination of the lender.

Force-placed Flood Insurance

Lastly, the final rule clarifies a number of items related to force-placed flood insurance:

• First, existing flood insurance coverage will be considered to have lapsed on the expiration date of the policy, despite the fact that the policy may provide the borrower with a 30-day grace period to renew the coverage;
• The coverage for policies that are cancelled will be considered to have lapsed on the cancellation date;
• The rule clarifies that lenders may not send the required 45-day notice until after the date the coverage has lapsed or on the date it is determined that the existing coverage is insufficient. However, the lender or servicer is permitted to send a notice prior to the expiration date as a courtesy to the borrower, but must still send the required 45-day notice after the expiration date.
• Financial institutions or their servicers are permitted to force-place insurance during the 45-day notification period and bill the borrower for the premiums and fees. However, those costs would have to be refunded to the borrower for any coverage overlap period if the borrower subsequently obtains flood insurance coverage.
• Last of all, when a financial institution or servicer receives notification (which can be a copy of the insurance policy declarations page) from the borrower that adequate flood insurance is now in place, the financial institution or servicer must, within 30 days, notify the insurance carrier to terminate the force-placed insurance and refund to the borrower all premiums and fees paid for the period of time during which the two policies may have overlapped.

You can find the full text of the rule here.