Flood Insurance Rule on Escrow, Detached Structures, LPI Finalized

The federal financial agencies today finalized a rule implementing the mandatory escrow and detached structure requirements in last year’s Homeowner Flood Insurance Affordability Act, which addressed affordability problems in the 2012 Biggert-Waters flood insurance reform law.

The final rule exempts detached structures from a requirement to be insured, protecting homeowners and commercial property owners from steep insurance bills for storage sheds or garages. In the final rule, the agencies agreed with recommendations from ABA and the American Bankers Insurance Association that the detached structures exemption should be available for commercial or agricultural purpose loans that are secured by a residence in addition to home loans.

HFIAA imposed mandatory escrow of flood insurance premiums and fees 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 loan qualifies for a statutory exception or the bank falls within the small bank exception. In addition, lenders are required to provide existing borrowers with the option to escrow flood insurance premiums. The final rule makes a number of ABA and ABIA-requested clarifications to the exceptions and extends until June 30, 2016, the date by which existing borrowers are to be given the option to escrow.

The agencies also included Biggert-Waters provisions on lender-placed insurance, clarifying that financial institutions have authority to charge a borrower for the cost of flood-related LPI starting on the date a borrower’s flood coverage lapses or becomes insufficient. The rules on LPI and detached structures take effect on Oct. 1, and the mandatory escrow provisions take effect on Jan. 1, 2016. For more information, contact ABA’s Anjali Phillips.