With all the excitement surrounding the implementation of the TILA-RESPA Integrated Disclosure rule, some other significant compliance changes got pushed to the back seat. Among them are clarifications to the Final Flood Insurance Rule Amendments, which went into effect Oct. 1, 2015, the result of efforts from five federal regulatory agencies. Other amendments to the flood insurance rules come into play with the start of the new year. Let’s take a look at the major changes and how will they impact your financial institution.
In a nutshell, the federal financial regulatory agencies jointly amended their flood insurance regulations in order to incorporate changes effected by the Homeowner Flood Insurance Affordability Act of 2014. Financial institutions will be required to escrow for flood insurance premiums and other fees for residential improved properties, but new exemptions from the mandatory flood insurance requirement are created for certain detached structures.
. There are also clarifications dealing with the force placement of flood insurance premiums.
Let’s delve into some details.
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.
Premiums and Fees Exceptions
There are a number of additional exceptions to this new requirement. Flood insurance premiums and fees are not required 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 and Escrow Requirements
Financial institutions, or the servicers acting on their behalf, will have to provide a revised Notice of Special Flood Hazards that includes 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.
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.
Jane Pannier is senior vice president and in-house counsel for AffirmX LLC, a developer of an innovative remote compliance review solution. Ms. Pannier is also SVP of AdvisX, a CUSO that specializes in using technology to more effectively deliver consulting services to financial institutions.