Five of the federal banking regulatory agencies (FDIC, FRB, OCC, FCA, and NCUA) recently issued a joint final flood insurance rule, which among other things:

  1. Requires escrowing of flood insurance payments for non-exempt loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after Jan. 1, 2016;
  2. Requires that borrowers be given the option to escrow flood insurance premiums and fees, as to residential loans extant as of Jan. 1, 2016;
  3. Clarifies that regulated lending institutions and servicers acting on their behalf are allowed to charge for lender-placed flood insurance; and
  4. States that the mandatory escrow of flood insurance premiums provisions and the escrow option provisions in this final rule will become effective on Jan. 1, 2016.  All other provisions will become effective on Oct. 1, 2015.

A copy of the final rule is available here.

More specifically, and among other things, the final rule:

  • Requires “regulated lending institutions” (which means any “bank, savings and loan association, credit union, farm credit bank, federal land bank association, production credit association, or similar institution subject to the supervision of a federal entity for lending regulation”) and servicers acting on their behalf to escrow of flood insurance premium payments for loans secured by residential improved real estate or mobile homes that are made, increased, extended or renewed on or after Jan. 1, 2016, unless the loan qualifies for a statutory exception;
  • Provides a new exemption to the flood insurance purchase requirement for any structure that is a part of a residential property, “but is detached from the primary residential structure and does not serve as a residence;”
  • Implements the additional exceptions from the escrow requirement for: “(i) loans that are in a subordinate position to a senior lien secured by the same property for which flood insurance is being provided; (ii) loans secured by residential improved real estate or a mobile home that is part of a condominium, cooperative, or other project development, provided certain conditions are met; (iii) loans that are extensions of credit primarily for a business, commercial, or agricultural purpose; (iv) home equity lines of credit; (v) nonperforming loans; and (vi) loans with terms not longer than 12 months.”  However, when a regulated lending institution (or a servicer acting on its behalf) determines that an exception no longer applies, the institution must require the escrow of flood insurance premiums and fees;
  • Requires regulated lending institutions and servicers acting on their behalf to provide residential borrowers with loans extant as of Jan. 1, 2016, the option to escrow flood insurance premiums and fees;
  • Provides new and revised sample notice forms and clauses concerning both the escrow requirement, and the option to escrow;
  • Allows an exemption for certain regulated lending institutions with total assets under $1 billion as of July 6, 2012, if “not required by Federal or State law to escrow taxes or insurance for the term of the loan, and did not have a policy of uniformly and consistently escrowing taxes and insurance;”
  • Clarifies that regulated lending institutions and servicers acting on their behalf have the “authority to charge a borrower for the cost of lender-placed flood insurance coverage beginning on the date on which the borrower’s coverage lapses or becomes insufficient;”
  • Specifies the circumstances under which regulated lending institutions and servicers acting on their behalf must terminate lender-placed flood insurance coverage, and refund payments to a borrower;
  • Specifies the documentary evidence regulated lending institutions and servicers acting on their behalf must accept to confirm that a borrower has obtained an appropriate amount of flood insurance coverage; and
  • Includes technical amendments, such as integrating the OCC’s flood insurance regulations for national banks and federal savings banks, and reference that the “FDIC has integrated its flood insurance regulations for State non-member banks and State savings associations in a separate rulemaking.”

According to the agencies, “the final rule does not address the private flood insurance provisions in the Biggert-Waters Act,” but they “plan to address these provisions in a separate rulemaking.”

The final rule is expected to be published in the Federal Register shortly.