Five federal regulatory agencies recently announced a joint rule that modifies regulations that apply to loans secured by properties located in special flood hazard areas. Flood hazard areas are delineated on maps issued by the Federal Emergency Management Agency (FEMA) and pertain to areas within the floodplain having a one percent or greater chance of flood occurrence in any given year.
The final rule requires regulated lending institutions, or servicers acting on their behalf, to escrow premiums and fees for flood insurance for any loan secured by residential improved real estate or a mobile home. The rules impact loans that are made, increased, extended, or renewed on or after January 1, 2016. Under a small-lender exception, certain lending institutions with total assets of less than $1 billion may not be required to escrow flood insurance premiums.
Additionally, the joint rule grants regulated lending institutions the authority to secure flood insurance coverage for a borrower with insufficient coverage and include the cost of the coverage in the outstanding loan. This type of coverage is known as “force-placed flood insurance coverage.” The rule also stipulates circumstances under which a lender must terminate force-placed flood insurance coverage and refund payments to a borrower. For example, if a borrower obtains a flood insurance policy that overlaps with a force-placed policy, the lender or servicer must refund any premiums paid by borrower for this overlap period.
Lastly, the rule includes a statutory exemption from the requirement to purchase flood insurance for a structure that is a part of a residential property if that structure is detached from the primary residence and does not also serve as a residence, such as a garage or barn. However, lenders may nevertheless require flood insurance on detached structures to protect the collateral securing the mortgage.
A copy of the final rule will be published in the Federal Register shortly, but an advance copy is available here.