On October 24, 2016, five federal regulatory agencies (Department of Treasury Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Farm Credit Administration, and the National Credit Union Administration) announced their approval of a joint notice of proposed rulemaking to amend regulations regarding loans secured by property located in special flood hazard areas. The proposed rule implements the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) provisions pertaining to escrowing flood insurance payments and pertaining to the exemption of certain detached structures from the mandatory flood insurance purchase requirement. HFIAA amends the provisions pertaining to escrow in the Biggert-Waters Flood Insurance Reform Act of 2012 (the Biggert-Waters Act).
The proposed rule, in accordance with HFIAA, requires regulated lending institutions to escrow premiums and fees for flood insurance for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after January 1, 2016, unless the regulated lending institution or a loan qualifies for a statutory exception. Additionally, the proposed rule requires that institutions provide to borrowers of residential loans outstanding on January 1, 2016, the option to escrow flood insurance premiums and fees. There are new and revised sample notice forms and clauses pertaining to the escrow requirement and the option to escrow included in the proposal. The proposal also eliminates the requirement to purchase flood insurance for a structure that is a part of a residential property located in a special flood hazard area if that structure is detached from the primary residential structure and does not also serve as a residence. However, under HFIAA, lenders may still require flood insurance on the detached structures to protect the collateral securing the mortgage. There is separate rule making of that will address other provisions of the Biggert-Waters Act for which the five agencies have jurisdiction and that were not amended by HFIAA. Comments will be due 60 days after the rule is published in the Federal Register, which is expected shortly.